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Perspectives from Above the Noise -- Week of February 12th, 2018

| February 12, 2018
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U.S. stocks fell sharply last week, as the S&P 500 slumped over 5% for its largest weekly slide since January 2016, ending a record stretch of extremely low volatility. Investors’ inflation fears were the primary catalyst for the sell off last week. The S&P 500 last experienced a 5% drop when the U.K. voted to leave the European Union in June 2016 and, thereafter, has had an uninterrupted period of 588 days without a 5% decline. Monday’s plunge of as much as 4.5% on the S&P 500 pushed the CBOE VIX Volatility Index up 116%, the sharpest increase ever. At one point, the S&P 500 fell as much as 12% from its January 26 all-time high, sending the benchmark index into correction status, while a Friday rebound trimmed its drop from the peak to 8.73%. The yield on 10-year Treasury notes reached as high at 2.90%, a fresh four-year high.

For the week, the S&P 500 fell -5.10%, the Dow Industrials lost -5.21% and the and the MSCI EAFE (developed international) sank -6.19%

What We’re Reading

Sell-off Overdue and Overdone? -- Market Watch

Treasury Yields Reach 4-Year High -- CNBC

Chart of the Week: Further Upward Yield Pressures Likely

As Chart 1 illustrates, there has been a sizeable upward shift in bond yields over the last year. We note that bond yields are now higher for Treasuries with maturities of three months to 10 years, while the 30-Year Treasury yield has shifted slightly downward. The shift in yields is primarily the result of two factors; the Federal Reserve raising interest rates, which has a big impact on the front end of the curve, and rising inflation expectations, which tend to impact longer rates. About half of the increase we have seen in bond yields occurred over the last three months, pushing yields on Treasuries with maturities of less than five years to their highest level since 2008.

We continue to anticipate upward pressure on yields throughout 2018, especially on the front end of the curve where Federal Reserve policy has the biggest impact. The Fed is likely to raise interest rates 2-4 times this year. Inflationary pressures are also picking up as the labor market tightens, but we should note that our near-term inflation expectation calls for only a moderate increase.

Some materials are chosen by the Cetera Investment Management team and summarized by Jason Vitucci who is not affiliated or registered with Cetera. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

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